The owner of a building approaches a banker for a loan to improve the property, to be secured by the rental proceeds. After reviewing the application, the banker assesses that, if the loan is granted, there is a 70% probability the rental proceeds will be $100 and a 30% probabihty the rental proceeds will be $30.

Required

a. Assume that the banker is risk neutral. How much would the banker be willing to lend on the security of the rental proceeds?

b. If the banker is risk averse, explain why he/she would only be wiUing to lend a lesser amount than in part a.

c. Now assume that if the rent is only $30, the banker assesses a 90% probability that the building owner will be "bailed out" by the government, in which case the rent would be restored to $100. How much would the risk neutral banker be willing to lend now? If every banker felt this way, what impUcations do you see for the banking system and the economy?